Morning all.
Ongoing dilemma in the family.
Here's situation.
1. We have paid for property that is currently a rental. Valued at about $520 000 in growing area. Very fast growing. Property tax is $6K plus. We simply cut check for it. $110 insurance. Rent is set at $2500, property manage takes 8% so we end with $2300 check every month.
2. Our current residence. Just bought last December. Valued at approximately $980K- $1 mil. We owe $670. Mortgage payment is $4560 I also make additional $500 principal payments each month.
Property tax $12K. Insurance $1200. We have approximately $200K equity in this property. Interest paid each month is approximately $2K plus. Plus escrow.
$120 K in saving account and growing. Taxable income is $180K.
Lease expires March next year. I might be wrong but my gut tells me renters will go for buy out.

Dilemma between us is simple. I can sell the rental, add say savings money and have current property paid in full in one payment. Then we have steady cash influx from jobs. Plus we have 401Ks and IRAs. I believe we run negative due to current mortgage payments and, in case something happens, end with mortgage payments. We had rental paid for for 2 years before we turned it into rental and that's GREAT feeling of freedom.
Wife believes this is "cash flow" and she wants to keep renting it for next say 10 years.
I am 62 and wife is 59, both in good health.

Appreciate your thoughts.
No, I shall not invest into stocks and such. Absolutely not my thing.

Thank you

Wed Nov 02, 2016 5:58 pm

oldguySenior Member

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You have about $720k in real estate equity, $120k in cash - ie, a Net Worth of $840k. The real estate spins off $27,000/y of rental income, plus you 'consume' about $50,000/yr of rentable property.

You have most of your NW tied up in real estate, that gives you very little diversity, you might want to convert some of that $720k into other investments.

And personally, I would rethink your present situation - ie, burning thru $50,000 of rent - that's a lot of rent for 2 people. Or maybe the property has sentimental value, etc?

Wed Nov 02, 2016 9:10 pm

ukrkozContributing Member

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Well, we are not interested in "other" investments. That's us.

My question is - sell and pay off current property or keep leasing it.

Wed Nov 02, 2016 10:47 pm

oldguySenior Member

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quote: My question is - sell and pay off current property or keep leasing it.

If you sell and direct all of your money to the residence, then 100% of your $840k NW will be tied up in your house. Personally, I wouldn't be comfortable with not having diversity,, all of your eggs in one basket - but that's just me. Even when I owned 5 houses, I kept them at 1/3 of my NW, kept 1/3 in bonds, and kept 1/3 in index fund. During the 35 yrs that I did that, usually 2 out of 3 made money.

Note: Be sure to hold back some money for taxes - the profit on the rental will be taxed at 15%, and the depreciation recapture will be at your ordinary tax rate. (I just sold a rental in 2015 so the tax bills are fresh on my mind, lol)

I agree with your wife, the rental cash flows - you have excess income stream to cover a vacancy and/or a repair. And in 10 years, the $520k house is likely to be valued at $850k to $900k.. And you will probably have raised the rent from $2300/m to $4000/m in those 10 years.
And I certainly wouldn't prepay (buy) mortgage principle, wait for the real estate market to GIVE you that equity over the next 10 yrs.

Thu Nov 03, 2016 2:28 am

ukrkozContributing Member

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We do not have everything tied in real estate.
We have 2 IRAs, 2 401Ks and a sizeable saving account. Plus steady income.
The way I see it, as rental only covers interest on current mortgage payments (we like what we have. It's well worth money to us and already grew $140K in value since we bought it).
This is why I do not see a positive cash flow in this situation.
We will definitely pay off current mortgage as fast as possible. That's just us. We do not like loans, period.
That said, fastest way to do it is to sell rental and pay off. Simple as line between A and B.
Then again, as it's rental, tax deduction will kick in.
Also, we may sell current property to downsize and move back into the rental, as property is 6 times smaller.
So, there are all kinds of aspects to this.
We can sell rental, pay off, and then collect then available salaries and invest into several properties, like my son does. That's another way, right?
My point of view is - I do not like mortgage and I do not see positive cash flow as is. Expense is > than income.

Thu Nov 03, 2016 4:50 pm

oldguySenior Member

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quote: We can sell rental, pay off, and then collect then available salaries and invest into several properties, like my son does. That's another way, right?
My point of view is - I do not like mortgage and I do not see positive cash flow as is. Expense is > than income.

It's hard to tell where you are going with this - you hate mortgages, you hate investing, etc. To me, that $140,000 appreciation on the $520k equity is a good rate.

You have 4 qualified accounts - that could be anything - $500k in mutual funds - or only $50k worth of savings accounts? The first will play a major part in your retirement (the Rule of 72), the latter won't affect your future.

As for your son's method - that worked well for me. If I was going to place $500k into rentals, I would never pay $500k cash for one house, instead I would make $100k Down Payments on 5 houses. I would have 5 - $27,000 rent checks per year. And if the houses appreciated $140,000 each, that would add $700,000 to my equity (tax free).

As for positive cash-flow, that's not where the money is. Plus the cash-flow is taxable. The appreciation is tax free.

Thu Nov 03, 2016 5:38 pm

ukrkozContributing Member

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If I was going to place $500k into rentals, I would never pay $500k cash for one house, instead I would make $100k Down Payments on 5 houses. I would have 5 - $27,000 rent checks per year. And if the houses appreciated $140,000 each, that would add $700,000 to my equity

That's a thought to consider. That's actually something I am agreeable with. But it still leads to selling rental.
It's not that i hate mortgages. But in volatile times, I don't want to get caught with one, when you know what hits the fan.
Mortgage free, we grow savings VERY fast. We live modest lives. Also, I don't want to work a moment longer after I hit 65. May go part time, yes. Well, 66.5 in my case.

Thu Nov 03, 2016 10:01 pm

ukrkozContributing Member

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make $100k Down Payments on 5 houses. I would have 5 - $27,000 rent checks per year. And if the houses appreciated $140,000 each, that would add $700,000 to my equity

quote:Originally posted by ukrkozIf I was going to place $500k into rentals, I would never pay $500k cash for one house, instead I would make $100k Down Payments on 5 houses. I would have 5 - $27,000 rent checks per year. And if the houses appreciated $140,000 each, that would add $700,000 to my equity

That's a thought to consider. That's actually something I am agreeable with. But it still leads to selling rental.
It's not that i hate mortgages. But in volatile times, I don't want to get caught with one, when you know what hits the fan.
Mortgage free, we grow savings VERY fast. We live modest lives. Also, I don't want to work a moment longer after I hit 65. May go part time, yes. Well, 66.5 in my case.

You don't have to sell the rental. You can pull the equity out with a home equity loan or line of credit.

Thu Nov 03, 2016 11:16 pm

ukrkozContributing Member

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before thread is hijacked....

Let me steer it back in the right direction.
As described and with our desire to NOT stay in loans, do we sell or keep the rental property?

Thu Nov 03, 2016 11:21 pm

ken-do-nimFull Member

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quote:Originally posted by ukrkozbefore thread is hijacked....

Let me steer it back in the right direction.
As described and with our desire to NOT stay in loans, do we sell or keep the rental property?

It's hard to give advice when your very premise - that loans are bad - most of us aren't going to agree with. Loans that have an interest rate below what you can generally get in the market are considered good. But, if you want to be debt free, and you have a $670,000 mortgage, then selling your other house will help lower that mortgage.

Fri Nov 04, 2016 11:18 am

ukrkozContributing Member

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No, it will make us mortgage free.
As I shall pay it off, I can easily do it.